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Wednesday, June 22, 2016

2016 Social Security Trustees Report

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Social Security
Subcommittee

Hearing on the 2016 Annual Report of the

Social Security Board of Trustees

Wednesday, June 22, 2016,
2:00 PM

By Michael G. Bindner

Center for Fiscal Equity

Chairman
Johnson and Ranking Member Becerra, thank you for the opportunity to submit my
comments on this topic. I will leave it to the Administration’s witnesses to
explain the Trustees’ Report and will instead confine myself to what needs to
be done in the future, with special emphasis on what not to do. These remarks will be similar to those
regarding the 2011 Trustees report, but at this point they bear repeating.

Lessons
from the Great Recession

The
only observation I will make regarding the Trustees report is that the 2008
Recession triggered by our continuing asset-based Depression has both temporary
and permanent effects on the trust fund’s cash flow. The temporary effect is a
decline in revenue caused by a slower economy and the temporary cut in payroll
tax rates to provide stimulus.

The
permanent effect is the early retirement of many who had planned to work
longer, but because of the recent recession and slow recovery, this cohort has
decided to leave the labor force for good when their extended unemployment ran
out. This cohort is the older 77ers and 99ers who needed some kind of income to
survive. The combination of age discrimination and the ability to retire has
led them to the decision to retire before they had planned to do so, which
impacts the cash flow of the trust fund, but not the overall payout (as lower
benefit levels offset the impact of the decision to retire early on their total
retirement cost to the system).

When
Social Security was saved in the early 1980s, payroll taxes were increased to
build up a Trust Fund for the retirement of the Baby Boom generation. The
building of this allowed the government to use these revenues to finance
current operations, allowing the President and his allies in Congress to honor
their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is
entirely appropriate to rely on increased income tax revenue to redeem them. It
would be entirely inappropriate to renege on these promises by further
extending the retirement age, cutting promised Medicare benefits or by enacting
an across the board increase to the OASI payroll tax as a way to subsidize
current spending or tax cuts.

The
cash flow problem currently experienced by the trust fund is not the trust fund’s
problem, but a problem for the Treasury to address, either through further
borrowing – which will require a quick resolution to the debt limit extension
and preferable through higher taxes for those who received the lion’s share of
the benefit’s from the tax cuts of 1981, 1986, 2001, 2003 and 2010.

The cost of delaying
actions to address Social Security’s fiscal challenges for workers and
beneficiaries.

Actions
should be taken as soon as possible, especially when they must be phased in, as
it is a truism that a little action early will have a larger impact later.

This
should not be done, however, as an excuse to use regressive Old Age and
Survivors Insurance payroll taxes to subsidize continued tax cuts on the top
20% of wage earners who pay the majority of income taxes. Retirement on Social
Security for those at the lowest levels is still inadequate. Any change to the
program should, in time, allow a more comfortable standard of living in
retirement.

The
ultimate cause of the trust fund’s long term difficulties is not financial but
demographic. Thus, the solution must also be demographic – both in terms of
population size and income distribution. The largest demographic problem facing
Social Security and the health care entitlements, Medicare and Medicaid, is the
aging of the population. In the long term, the only solution for that aging is
to provide a decent income for every family through more generous tax benefits.

The
free market will not provide this support without such assistance, preferring
instead to hire employees as cheaply as possible. Only an explicit subsidy for
family size overcomes this market failure, leading to a reverse of the aging
crisis.

The
recommendations for raising net income are within the context of comprehensive
tax reform, where the first 25-28 percent of personal income tax rates, the
corporate income tax, unemployment insurance taxes, the Hospital Insurance
payroll tax, the Disability Insurance payroll tax and the portion of the
Survivors Insurance payroll tax funding survivors under the age of 60 have been
subsumed by a Value Added Tax (VAT) and a Net Business Receipts Tax (where the
net includes all value added, including wages and salaries).

Net
income would be adjusted upward by the amount of the VAT percentage and an
increased child tax credit of $500 to $1000 per child per month. This credit
would replace the earned income tax credit, the exemption for children, the
current child tax credit, the mortgage interest deduction and the property tax
deduction. This will lead employers to decrease base wages generally so that
the average family with children and at an average income level would see no
change in wage, while wages would go up for lower income families with more
children and down for high income earners without children.

Gross
income would be adjusted by the amount of tax withholding transferred from the
employee to the employer, after first adjusting net income to reflect the
amount of tax benefits lost due to the end of the home mortgage and property
tax deductions.

This
shift in tax benefits is entirely paid for and it would not decrease the
support provided in the tax code to the housing sector – although it would
change the mix of support provided because the need for larger housing is the
largest expense faced by growing families. Indeed, this reform will likely
increase support for the housing sector, as there is some doubt in the
community of tax analysts as to whether the home mortgage deduction impacted
the purchase of housing, including second homes, by wealthier taxpayers.

Within
twenty years, a larger number of children born translates into more workers,
who in another decade will attain levels of productivity large enough to
reverse the demographic time bomb faced by Social Security in the long term.

Such
an approach is superior to proposals to enact personal savings accounts as an
addition to Social Security, as such accounts implicitly rely on profits from
overseas labor to fund the dividends required to fill the hole caused by the
aging crisis. This approach cannot succeed, however, as newly industrialized
workers always develop into consumers who demand more income, leaving less for
dividends to finance American retirements. The answer must come from solving
the demographic problem at home, rather than relying on development abroad.

This
proposal will also reduce the need for poor families to resort to abortion
services in the event of an unplanned pregnancy. Indeed, if state governments
were to follow suit in increasing child tax benefits as part of coordinated tax
reform, most family planning activities would be to increase, rather than
prevent, pregnancy. It is my hope that this fact is not lost on the Pro-Life
Community, who should score support for this plan as an essential vote in
maintaining a perfect pro-life voter rating.

Obviously,
this proposal would remove both the mortgage interest deduction and the
property tax deduction from the mix of proposals for decreasing tax rates while
reducing the deficit. This effectively ends the notion that deficit finance can
be attained in the short and medium term through tax reforms where the base is
broadened and rates are reduced. The only alternatives left are a generalized
tax increase (which is probably necessary to finance future health care needs)
and allowing tax rates for high income individuals to return to the levels
already programmed in the law as of January 1, 2013. In this regard, gridlock
is the friend of deficit reduction. Should the President show a willingness to
let all rates rise to these levels, there is literally no way to force him to
accept anything other than higher rates for the wealthy.

This
is not to say that there is no room for reform in the Social Security program.
Indeed, comprehensive tax reform at the very least requires calculating a new
tax rate for the Old Age and Survivors Insurance program. My projection is that
a 6.5% rate on net income for employees and employers (or 13% total) will
collect about the same revenue as currently collected for these purposes,
excluding sums paid through the proposed enhanced child tax credit. This
calculation is, of course, subject to revision.

While
these taxes could be merged into the net business income/revenue tax, VAT or
the Fair Tax as others suggest, doing so makes it more complicated to enact
personal retirement accounts. My proposal for such accounts differs from the
plan offered in by either the Cato Institute or the Bush Commission (aka the
President’s Commission to Save Social Security).

As
I wrote in the January 2003 issue of Labor and Corporate Governance, I would
equalize the employer contribution based on average income rather than personal
income. I would also increase or eliminate the cap on contributions. The higher
the income cap is raised, the more likely it is that personal retirement
accounts are necessary.

A
major strength of Social Security is its income redistribution function. I
suspect that much of the support for personal accounts is to subvert that
function – so any proposal for such accounts must move redistribution to
account accumulation by equalizing the employer contribution.

I
propose directing personal account investments to employer voting stock, rather
than an index funds or any fund managed by outside brokers. There are no Index
Fund billionaires (except those who operate them). People become rich by owning
and controlling their own companies. Additionally, keeping funds in-house is
the cheapest option administratively. I suspect it is even cheaper than the
Social Security system – which operates at a much lower administrative cost
than any defined contribution plan in existence.

Safety
is, of course, a concern with personal accounts. Rather than diversifying
through investment, however, I propose diversifying through insurance. A
portion of the employer stock purchased would be traded to an insurance fund
holding shares from all such employers. Additionally, any personal retirement
accounts shifted from employee payroll taxes or from payroll taxes from
non-corporate employers would go to this fund.

The
insurance fund will save as a safeguard against bad management. If a third of
shares were held by the insurance fund than dissident employees holding 25.1% of
the employee-held shares (16.7% of the total) could combine with the insurance
fund held shares to fire management if the insurance fund agreed there was
cause to do so. Such a fund would make sure no one loses money should their
employer fail and would serve as a sword of Damocles’ to keep management in
line. This is in contrast to the Cato/ PCSSS approach, which would continue the
trend of management accountable to no one. The other part of my proposal that
does so is representative voting by occupation on corporate boards, with either
professional or union personnel providing such representation.

The
suggestions made here are much less complicated than the current mix of
proposals to change bend points and make OASI more of a needs based program. If
the personal account provisions are adopted, there is no need to address the
question of the retirement age. Workers will retire when their dividend income
is adequate to meet their retirement income needs, with or even without a
separate Social Security program.

No
other proposal for personal retirement accounts is appropriate. Personal
accounts should not be used to develop a new income stream for investment
advisors and stock traders. It should certainly not result in more “trust fund
socialism” with management that is accountable to no cause but short term gain.
Such management often ignores the long-term interests of American workers and
leaves CEOs both over-paid and unaccountable to anyone but themselves.

Progressives
should not run away from proposals to enact personal accounts. If the proposals
above are used as conditions for enactment, I suspect that they won’t have to.
The investment sector will run away from them instead and will mobilize their
constituency against them. Let us hope that by then workers become invested in
the possibilities of reform.

All
of the changes proposed here work more effectively if started sooner. The
sooner that the income cap on contributions is increased or eliminated, the
higher the stock accumulation for individuals at the higher end of the age
cohort to be covered by these changes – although conceivably a firm could be
allowed to opt out of FICA taxes altogether provided they made all former
workers and retirees whole with the equity they would have otherwise received
if they had started their careers under a reformed system. I suspect, though,
that most will continue to pay contributions, with a slower phase in –
especially if a slower phase in leaves current management in place.

One
new wrinkle is that I would also put a floor in the employer contribution to
OASI, ending the need for an EITC – the loss would be more than up by gains
from an equalized employer contribution – as well as lowering the ceiling on
benefits. Since there will be no cap on the employer contribution, we can put
in a lower cap for the employee contribution so that benefit calculations can
be lower for wealthier beneficiaries, again reducing the need for bend points.

Thank you for the
opportunity to address the committee. We are, of course, available for
direct testimony or to answer questions by members and staff.